Thursday, November 13, 2008
So why wasn’t it a problem on the way up?
The Bank of England has often insisted that the relationship between house prices and consumer demand is tenuous. But now it appears to be engaged in a sober reassessment of the significance of house prices for the economy and its role in consumption, pointing to its particular role as collateral for bank borrowings. The Bank noted that its own data showed that the level of mortgage equity withdrawal had fallen sharply. Moreover, it pointed out that household indebtedness – much of it related to housing – had increased sharply since the 1990s slump, hitting 170% of annual income in 2008. "Lower house prices reduce the amount of housing equity that homeowners can borrow against.” The Bank noted that a resumption of lending was critical to its forecasts of economic recovery.